Say Goodbye to Split-Dollar Life Insurance

Over the years my office helped structure hundreds of split-dollar life insurance plans (Split-$ Plans). What a great wealth-building strategy. But say This article has two purposes: 1) to eulogize Split-$ Plans and 2) render a public service. Now the public service part. The IRS issued IRS Notice 2002-8 last year. You have to know only two things: First, if you dont have a Split-$ Plan, dont put

Over the years my office helped structure hundreds of split-dollar life insurance plans (Split-$ Plans). What a great wealth-building strategy. But say “goodbye.” This article has two purposes: 1) to eulogize Split-$ Plans and 2) render a public service.

Now the public service part. The IRS issued IRS Notice 2002-8 last year. You have to know only two things: First, if you don’t have a Split-$ Plan, don’t put one in. No more tax advantages.

Second, and most importantly, for unlucky readers who are a party to a Split-$ Plan, the show is over. You have until Jan. 1, 2004, to kill your Split-$ Plan or pick one of the choices (they’re all lousy) offered by Notice 2002-8. In my opinion you want to stay out of the spider web of the Notice.

And suppose you do nothing and allow your Split-$ Plan to live and breathe when Jan. 1, 2004, dawns. You’ll be sorry; Notice 2002-8 will bury you with hideous tax consequences.

What should you do if you or your business is a party to a Split-$ Plan? It would take a small book to spell out all the choices, possibilities and tax traps.

Instead, I have made arrangements for readers of this column to have their Split-$ Plans analyzed. Then, based on your facts and circumstances and your exact goals, spell out what you might do. And also what you must not do.

IRS to crack down on offshore credit card fraud. This is how the tax-fraud game works: A taxpayer (Ted) hides unreported income in a tax-haven bank (a bank located in a country that has no taxes and the bank keeps all information concerning customers secret). So the bank issues a credit card to Ted, and he draws his income (“tax-free”) out of his account by using his credit card to pay for various goods and services.

Not a good idea. The IRS is developing lists of the Teds in the USA and a small army of auditors will be out to get you (Ted). My advice: Report that income on your next return. Otherwise, Ted, taxes, interest, penalties and jail time are likely to follow.

S Corporation must treat working shareholders as employees. The sole shareholder of an S corporation (Sam) also performed services for the corporation. Sam got a 1099 form from the corporation that treated him as an independent contractor. Sam reported the profits of the corporation as dividends on his tax return, but the business did not pay any payroll taxes.

The Tax Court (119 TC No. 5) ruled thumbs down on Sam’s tax-saving scheme. The court ruled Sam was an employee and the corporation’s profits are his wages (subject to payroll taxes).

My advice: If you are a shareholder/ employee of an S corporation, pay yourself a reasonable salary (at least the same amount you would pay someone else for what you do).

Corporate officer held personally responsible for payroll taxes. If an employer fails to deposit or pay payroll taxes (including withholding tax), the IRS can go after and collect 100% of the unpaid tax from a “responsible person.” Generally, if you have both the knowledge that taxes were unpaid and the authority to sign checks, the IRS can and will nail you.

But a recent case (U.S. v. Steven Lindsey, CA 10/7/2002) raises the bar. Here’s the story: Lindsey owned 50% of TFS, had financial control over TFS, but he did not have authority to sign checks. Yet, the court nailed Lindsey for nonpayment of payroll taxes. The court clearly held that Lindsey had the actual authority and ability to cause the taxes to be paid.

When a person has significant control over an employer’s finances (like Lindsey), it is not necessary that he be able to write checks to make him a “responsible person” under the law.

My advice: Always pay those payroll taxes. No excuses. This is one issue where the IRS attacks, wins and then haunts you to collect 100% of the unpaid taxes, plus penalties and interest.

Irving Blackman is a partner in Blackman Kallick Bartelstein; e-mail at iblackman@bkbcpa.com or tel. 312/207-1040.